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Tata Steel: One time gain boosts profits - Views on News from Equitymaster

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Tata Steel: One time gain boosts profits
Nov 14, 2014

Tata Steel has announced its September quarter (2QFY15) results. On a consolidated basis the company has reported a 2.4% YoY decline in topline. However, the bottomline increased by 36.8% YoY on the back of one time exceptional gain. Here is our analysis of the results.

Performance summary
  • Consolidated topline declines by 2.4% YoY. However, on a standalone basis the growth came in at 8.7% YoY on the back of higher volumes, realizations and better product mix. The group deliveries stood at 12.95 million tons (MT) in 1HFY15.
  • Consolidated operating profit was down by 1.7% YoY while the operating margins increased by nearly 10 bps.
  • On a consolidated basis, net profits increased by 36.8% YoY due to an exceptional gain of Rs 11.4 bn arising from sale of land.
  • The consolidated D/E ratio stood at 1.35x

Financial Performance
  Standalone results Consolidated results
(Rs m) 2QFY14  2QFY15 Change 2QFY14  2QFY15 Change
Net sales 99,210 107,851 8.7% 366,449 357,771 -2.4%
Expenditure 69,831 76,909 10.1% 329,395 321,343 -2.4%
Operating profit (EBITDA) 29,379 30,941 5.3%  37,054 36,428 -1.7%
EBDITA margin (%) 29.6% 28.7%   10.1% 10.2%  
Other income 3,257 2,624 -19.4% 2,034 3,215 58.1%
Interest (net) 4,366 4,888 12.0%  10,666 12,328 15.6%
Depreciation 5,510 4,746 -13.9%  14,440 14,295 -1.0%
Profit before tax 22,760 23,932 5.1%  13,981 13,021 -6.9%
Extraordinary income/(expense) 0 11,469 NM  -   11,450 NM
Tax 7,173 10,636 48.3% 4,472 11,748 162.7%
Profit after tax/(loss) 15,587 24,764 58.9% 9,510 12,723 33.8%
Minority interest 0 0   (375)  (33) NM
Share of profit of associates 0 0   33 (146) NM
PAT after minority and sh. of assoc. profit 15,587 24,764 58.9% 9,168 12,543 36.8%
Net profit margin (%) 15.7% 23.0%   2.5% 3.5%  
No. of shares (m)   971      971  
Diluted earnings per share (Rs)   25.5     12.9  
Price to earnings ratio (x)*   5.7     15.5  
(* trailing 12 months earnings)

What has driven performance in 2QFY15?
  • The group's steel deliveries remained flat at 6.5 MT in 2QFY15. The India and European deliveries stood at 2.11 MT and 3.36 MT respectively during 2QFY15. The Indian operations reported stable performance with the deliveries of automotive & special products increasing by 30% YoY while deliveries to the high end segment were up by 38% YoY

  • The group EBITDA per ton declined 1.1% YoY to Rs 5,772 per ton in 2QFY15. The EBITDA per ton from the Indian operations stood at Rs 15,151 during the quarter.

  • Tata Steel's consolidated underlying debt stood at Rs 568.9 bn in 2QFY15. The company incurred a total capex of Rs 33.4 bn in 2QFY15.

  • The India steel deliveries stood at 4.21 MT and the Europe steel deliveries stood at 6.55 MT during 1HFY15.

  • The operations in the Khondbond mine and Sukinda Chromite mine continue to remain suspended.

  • The operations in South East Asia were under pressure due to low priced imports. Deliveries in 1HFY15 stood at 2.03 MT.

  • Both the standalone and consolidated profits of the company registered a sharp jump of 58.9% YoY and 36.8% YoY respectively due to a one time exceptional gain arising from sale of land.
What to expect?
At the current price of Rs 470, the stock is trading at a multiple of 15.5x its consolidated trailing twelve month earnings. Management expects the European operations to revive with demand expected to be in the region of 2.4% odd in 2015. However, imports are likely to remain a threat, putting pressure on EU still mills. The company has been focusing on cutting costs and strengthening customer focus to boost sales in Europe where demand has virtually stagnated. While the outlook for steel has been stable in SE Asia, the same in India has been weak. Though the consumption levels may increase, rising imports may keep prices under check.

While the company was able to swap US$7 bn of forex debt on better terms & managed to monetize some of its non-core assets which remained an overhang on the stock until now, the current valuations at 15.5x are not cheap. We are likely to roll forward our estimates to FY17 and shall update our subscribers of the revised target price soon.

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